dennis mccain
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A High Beta Put-Call Strategy

10/1/2017

3 Comments

 
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Occasionally while screening stocks on the weekend I come across a security with a relatively high beta that exhibits a lot of up and down movement in the short term but little if any movement in the long term. These two relative degrees of volatility can often be recognized by viewing volatility on the daily chart versus volatility on the weekly chart.

When I identify a stock I would like to own that has these characteristics, I consider putting in place a strategy of entering and exiting the stock using puts and calls. Specifically I use cash secured puts and covered calls. It's a cash intensive strategy but it's also a very lucrative strategy. 
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The gist of the strategy is simple. First I always identify a stock that I wouldn't mind owning just in case the strategy doesn't work and I end up owning the security. This step is important because I wouldn't want to end up buying a security I would not have wanted to buy outside this strategy. I would then use the daily and weekly charts to determine the stock's support and resistance areas. I would then sell cash secured puts at or just above the support level to collect the put premium and increase the probability of having the stock "put" to me. Once I own the stock, I'd sell covered calls on the stock at or just below resistance to collect the premium and increase the probability of having the stock "called" from me.

In the full turn of the trade I would have collected a put premium, a call premium, and the capital gain on the security as it rose from the support level to the resistance level. If the stock continues to reverse up and down over time, this trade can be repeated over and over again. 


This is obviously a trading strategy and not an investing strategy. Investors that are not familiar with technical analysis, put and call options, or investors that are not nimble enough to trade in this type of timeframe, should not attempt this type of strategy. However, a trader that is, can make a nice income using this stately. I generally use the income generated using this strategy to buy dividend growth stocks, which is a much more conservative investing strategy.


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A High Beta Put-Call Strategy
3 Comments
Dan vellucci link
10/2/2017 11:56:49 am

Hi Dennis. I'm curious about how you develop a screening strategy and what tools you prefer for those "weekend" screening reviews. Are you working off of a personal watchlist, or using a technical tool that identifies stocks that meet your pre-identified criteria. Thanks for listening. I'm a recent reader and can't believ I've only discovered your site recently. It's very good!

Reply
Dennis link
10/2/2017 12:51:48 pm

Dan....

My primary screening tool is FINVIZ. It’s an outstanding tool that’s free to use and has an incredible amount of options. I generally sort for companies with increasing revenues, earnings and dividends. Once I find a group of companies I’m interested in, I go to StockCharts.com and study the price chart. There I look for companies that are trending higher.

Additional backup info is often gathered from Yahoo Finance but the other two are my principle points of reference. It’s really that simple for me. The fundamental analysis I sort for tells me which companies I should be interested in and the technical analysis identifies stock price timing.

I’m not always right but when I’m not this method keeps me out of trouble. Risk avoidance is almost as important as being right.

I wish you the best in all your trades and I hope you find the time to visit my site often.

Respectfully,
Dennis McCain

Reply
Jack H link
3/14/2018 06:04:14 am

Re: Hi Dennis
I am a long time reader and I enjoy reading your insights.
RE: High Beta Put-Call Strategy
Could you please give some examples of stocks and examples of strike price and put income desired per trade as well as desired duration of option contract.
Also, please state what you consider an appropriate rate of return that an investor can anticipate by using this strategy.
Additionally, I would like to read more articles on the trading indicators that you are using - aka more articles on the MACD and Bollinger Bands etc.
Thanks in advance.
Jack

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    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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